The Long Run Gets a Little Longer

By Fleming Meeks

NIKE MAY BE THE GLOBAL LEADER in athletic footwear and apparel, but the company’s shares look like they left their game in the locker room. Since I wrote a positive Alert on the company in May, the stock is down 36%, to $42.81 at Thursday’s close (“Watch These Shares Run Faster and Jump Higher”). That’s better than the 45% decline in the S&P 500, but this is a race that nobody’s winning.

On the eve of the Summer Olympics and European soccer championships, shares of (ticker: NKE) seemed poised to jump higher. Research stretching back to the mid-1980s showed that the company’s stock historically peaked 92 days after the Olympics and 138 days after the soccer championships. (Both events are held every four years.) That suggested the stock would hit a short-term peak around mid-November. What that data missed was the stock market’s mid-November plunge to an 11-year low.

The long-term story, however, is still in tact. At a time when consumer products companies are reining in marketing spending, Nike spends four times as much on marketing in the U.S. than its nearest competitor. So it’s hard to imagine that the company won’t continue to gain market share over its chief rivals, Adidas, Puma and Reebok.

Nike’s overseas business, which represents about two-thirds of the company’s revenue, should continue to gain traction as well, with sales in China still growing at better than 20%.

Also worthy of note: Last year Oak Hill Investment Management, a private equity and venture capital shop that manages money for Nike founder Phil Knight, among others, started a new fund to invest in publicly traded companies; in the fourth quarter, the fund took a 7% stake in Nike.

Last week Nike announced it was streamlining its business to get products to market faster. This “next stage of [the] business model execution,” as the company put it, includes cutting 4% of its 35,000 person global workforce. The market yawned at the news, which could help push the company’s fiscal 2010 earnings per share up as much as 12%, to $4.20, over this year’s forecast $3.75. (The consensus estimate for FY ’10 is $4.09; the company’s fiscal year ends in May.)

Putting an estimate on next year’s earnings in the current global economic malaise may be “completely random,” as my kids would say. What is known, however, is that Nike is one of the world’s most powerful brands, it’s a free cash flow machine and it has $2.3 billion, or $4.72 a share, in net cash on its balance sheet. And Nike’s shares trade at a discount to the Standard & Poor’s 500, an index where the E in the P/E is falling even faster than the P.

Nike’s shares could rebound to $60 or more. And while the dividend yield, at 2.2% is below that of the broad market, Nike has raised its payout 21% a year for the past five years. This is a quality company at a discount price. I still think it will run faster and jump higher.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com